SELF
INSURANCE TRUST SCHEMES
WHO
MOVED YOUR CHEESE OR WILL YOU HAVE ANY CHEESE TO EAT
NEW
AUTHORIZED NON-TRADITIONAL CONDOMINIUM INSURANCE
An
original article by Professional Public Adjuster Charles R. "Dick" Tutwiler,
C.P.C.L.A., P.C.L.A.; 12/2007
As
a result of the "insurance crisis"(depending on your perspective) in
Florida following the big four hurricanes in 2004 and the three sea maidens/witches
of 2005, Hurricanes Rita, Katrina and Wilma, no stone has been left unturned in
the quest for some type of insurance protection at a reasonable price. Not only
is price a factor but insurance at any cost is problematic in that coverage in
many cases simply is not available. One only has to look at the lack of law and
ordinance coverage particularly for condominiums to see the sea change in insurance
markets/ coverage over the last five years.
This insurance crisis is particularly
acute in the condominium communities across the state given this issue of pricing
and market availability as well as what has been widely reported of the perception
in the condominium communities that nothing will be paid by the insurance company
because of high deductibles, restrictive coverage/policy language, and poor service
from their insurance companies. Throw in the bankruptcy of one of Florida's largest
condominium carriers, Southern Family, and you will understand the entrepreneur
juices that are flowing to find a better way.. Thus, new protection schemes have
been proposed to fill voids left by these perceived inequities and short falls.
As
pointed out in an article authored by Ken S. Direktor, Esquire and Lance D. Clouse,
Esquire of the law firm of Becker & Poliakoff, titled Is Self Insurance Right
For Your Association, the Florida Statutes governing condominiums has historically
provided that an association or group of associations may self insure against
claims against the association, the association property, and the condominium
of property required to be insured by an association upon compliance with its
applicable provisions of (Sections) 624.460 - 624.488 Florida Statutes. The 2007
amendment specifically states that self insurance is adequate insurance under
the statute for condominiums.
Self insurance
proposals now seems to be in vogue and a 2007 legislative amendment has opened
the door for these plans to fit the needs of communal living communities. As the
legislature has amended the statute these plans are now before the Department
of Financial Services for their review and approval.
Some of the
selling points being offered for these self insurance trusts are:
1. "They
are Florida authorized and are admitted insurance companies".
2. "The
trust must comply with every rule and regulation of the Florida Office of Insurance
Regulations."
3. These programs
will save between 20% to 30% in costs as it cuts out the traditional insurance
company overhead cost.
4. They say
it will achieve significant cost savings by purchasing the truly catastrophic
high cost reinsurance on a wholesale basis.
5. The services
and employees needed to manage the trust are purchased on a contract basis as
needed and thus the employee and service costs are not a fixed and incurred cost
but in fact is a cost that is incurred on an as needed basis.
6. They
are member owned not for profit insurance companies, all profits (if any) are
income belonging to the trust member.
The
trust proposals that have been offered to date stated that the trust will provide
an identical property policy and coverage that will mirror Citizens wind and hail
policy and forms.
Obviously
the self insurance schemes are to date from this writer's experience untested
and certainly have raised many questions regarding how they will work in a truly
catastrophic event.
One obvious
questions is, how will the policyholders be paid for the damages given that there
is no traditional insurance company with staffing and adjusters available to service
the policyholder. The trust proposals to date have indicated that a third party
administrator (TPA) will be appointed by the trust and are to be "under the
authority and control of the trustees and members, and the TPAs will adjust the
claims.
One only has
to imagine the conflict and discourse that is likely to result in this scheme
given that one or several groups of condominium buildings in a trust may object
to the adjustment proposed by the trusts TPA adjuster in adjusting and presenting
a settlement for which all members of the trust will have to pay the assessment
for the loss to one building when the other trust members building damage did
not exceed their deductible.
Other big
factors involved in these schemes is that they do not have the Florida Insurance
Guarantee Association (FIGA) backing should the trust fail.
From the
point of view of the community associations members there could be significant
issues with lenders in that given that there is no traditional insurance and the
losses are to be paid through assessment, certainly the financial institutions
holding mortgages or being asked to provide a mortgage could have second thoughts
or perhaps at worse, call mortgages for violation of the loan agreement terms
regarding insurance.
One trust
states that "prior to beginning operations the trust will receive a credit
rating that will be acceptable to all lending institutions in the United States
and all foreign banks that accept U.S. ratings."
While the
above plans to date propose the self insured trust to be funded by assessments
for the loss between the hurricane deductible and the reinsurance limit, certainly
one has to take into consideration the reinsurance policy limit as it relates
to these trusts particularly for large catastrophic losses. If for example the
total insured value of all the trust assets (multiple buildings and locations)
and particularly if they are located in one geographical area, significantly exceeds
the assessable amount of the gap between the deductible and the reinsurance, any
loss above the reinsurance will have to borne in total by all of the individual
unit owners in the collective trust. This could be a significant assessment given
a catastrophic loss to geographically closely located properties.
Should some
members fail to pay their part of the assessment then those that do will share
in the deficiency on a proportionate basis. The trust would then take legal action
to recover from those that did not pay.
While I am
sure that the controversial hurricane models are being consulted for the probable
maximum loss there nonetheless is no guarantee that the losses will not exceed
the assessed self insured trust assessment amount, the reinsurance, as well as
some possible contribution by the Florida Hurricane Catastrophe Fund which may
impose a 10% co-payment requirement. These assessments will take place at a time
of great financial strain as one can imagine the loss to unit owners property
that from experience has shown as much as 50% of all unit owners have no insurance
and/or are greatly under insured.
Another example
of the reliance on these probable maximum loss proposals is a program recently
introduced to the condominium community on the West Coast of Florida wherein a
national broker using a 250 year windstorm probable maximum loss calculation concluded
that within a certain geographical area the probable maximum loss would be $155,000,000.00.
This was the limit set in the policy that was being offered as a total pay out
for this program, however, it was insuring $1.5 billion dollars worth of property
or in this case the coverage proposed by the broker was limited to approximately
15% of the total insured value .
This example
put forth by a traditional insurance company and a broker is using questionable
modeling data in my view to gain market share from in this case Citizens Insurance
Company, by reduced pricing offset by a theoretical 250 year worst case scenario.
If considering insurance trusts or other insurance schemes in this writer's view
it is critical to understand who your partners are in these plans. Concentration
of all the trust members, as in the case of the recent broker proposals, in one
geographical area is a prescription for financial ruin. Not only is the geographical
disbursement important, but also the condition and age of the buildings are critical
considerations.
1.
Lloyds is now talking about the one billion dollar storm, as a real reality.
2.
Advances for emergency service - re-roofing, etc. may prove to be very pragmatic
in that the question will come up as to how self insured trusts are going to come
up with financial funds on an emergency basis given the lack of a traditional
insurance company's financial clout to make advance that are so critical to preserve,
protect and mitigate damages.
In conclusion,
this paper is not meant to provide an in depth analysis of the pros and cons of
the self insured program, however, I think it is beneficial for conference attendees
to be aware of these insurance schemes that have now been authorized by the Florida
legislature and the plan to see where your firms services and skills may be of
benefit to policyholders in the event these plans that are now authorized become
part of the insurance dynamic in Florida.
Finally, I
have enclosed some sample trust documents as well as an advisory from the Office
of the Florida Insurance Consumer regarding the self insured funds.
Respectfully
Submitted,
Charles R. "Dick" Tutwiler
C.P.C.L.A., P.C.L.A.
813.287.8090
813.287.0862 (Fax)
tutwiler@publicadjuster.com
END/
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